morokoy
3 months ago
CRH plc (NYSE:CRH) is a leading player in the global construction materials industry. It provides aggregates, construction materials, beams, pipes, and other products. CRH plc (NYSE:CRH)’s diversified product base as well as a global presence means that it benefits from lower costs through economies of scale. At the same time, the fact that it focuses exclusively on the construction industry means that the firm struggles when construction spending drops due to weak economic activity. This trend was clear in 2022 when CRH plc (NYSE:CRH)’s shares lost 24% during the year as the Federal Reserve tightened interest rates to control inflation. High rates lead to a slowdown in construction due to difficulties with working capital finance and capital generation. While it is a global player, North America represents 75% of CRH plc (NYSE:CRH)’s operating income. This positions it well to utilize increased US government spending on semiconductor fabs, green energy infrastructure, and overall infrastructure through initiatives such as the CHIPS and Science Act, the Bipartisan Infrastructure Act, and the Inflation Reduction Act.
L1 Capital mentioned CRH plc (NYSE:CRH) in its Q2 2024 investor letter. Here is what the firm said:
“In our view, measuring the performance of investments over short time horizons such as three months is meaningless. While CRH and Eagle Materials detracted from the Fund’s returns this quarter, they were both leading positive contributors in the prior quarter. Since Inception of the Fund over 5 years ago, both companies have been top ten contributors to the Fund’s returns.
Recently, there has been some negative data that is causing a sell-off in the share price of CRH and Eagle Materials. Both these companies supply building products to the infrastructure, residential and commercial construction sectors. CRH has around 75% exposure to North America, with the remainder principally Europe (CRH has also recently acquired the majority of Adbri in Australia). Eagle Materials solely operates in the U.S.
Demand from the U.S. infrastructure sector is likely to remain robust for the medium term due to increased Federal and State spending, supported by the $1.2 trillion Infrastructure Investment and Jobs Act. Short term activity has been disrupted by bad weather – we think this is complete noise and is just slightly delaying projects, although CRH and Eagle Materials’ June 2024 quarterly results will likely be impacted.
Housing activity has recently softened a little, with affordability remaining an issue. Demand for housing remains strong, and the housing construction industry is responding through incentives such as subsidising mortgage rates for buyers, and building slightly smaller, cheaper homes.
While there will always be short term fluctuations in activity levels and we do expect softening in apartment construction, over time we expect solid new housing construction as well as repair and renovation activity levels to support demand for CRH and Eagle Materials’ products, with potential for meaningful upside in a lower interest rate environment. Commercial activity remains mixed, with pockets of strength such as data center construction and resilient areas such as hospital and education construction, offset by weakness in areas such as office construction.
In our view the market is not always efficient. Back in our December 2022 Quarterly Report we were pounding the table on Amazon.com (Amazon), stating that the share price had been oversold and offered compelling value. Since then, Amazon’s share price has increased nearly 140%. Over recent months, the share price of Eagle Materials and CRH have fallen 20% and 15% respectively from their recent highs. Now trading on a P/E ratio of 13x to 14x, we consider both companies are trading at attractive valuations for investors with a longer-term investment horizon, willing to look through short term pressure.
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